Diary of a Private Investor

What price quality?

I find myself in a dilemma and to some extent it is something I generally try to avoid – market timing. However, I have a significant lump of cash sitting on the sidelines and I would like to use this to double-up on some of my high conviction holdings, among them my “six of the best” quality shares. But if I buy now will I be buying Quality at a Reasonable Price (QARP)?

To help me answer this question, I put together the table below, partly to share the quality metrics I use and partly to assess whether I am overpaying for this quality (or not) if I were to double-up now.

qarp

Quality Metrics
Market Cap > Enterprise Value
Stockopedia Quality Rank > 80
Piotroski Score > or equal to 5
Magic Formula > or equal to B+

The weakest against this criteria is VCT and it falls slightly short on the Piotroski score, nonetheless, I have kept it in because of my assessment based on qualitative research.

Valuation
This is trickier. I like to see a ROE percentage being large than the PE ratio and I like to have a decent dividend. As I am not buying “value” per se, measures like PEG Ratio make the price look expensive. For example, the forward PEG for Zytronic is 4.72 when 0.5-1.0 would be my normal value measure. So, while expecting to pay more than 10 times forecast earnings for quality, I definitely want to see this figure less than 20. The comparison to the Return on Equity provides an additional sanity check. All six shares above fall into this range and

On the basis that high conviction shares of this nature are “buy and hold” for me, perhaps not forever but certainly while the growth story remains intact and is supported by results, I am also looking for yield. Ideally this will be above the market average which is currently 3.28% for the FTSE All Share. The table above shows that BJU and D4T4 fall some way short of this figure. In the case of BJU, they have a habit of paying special dividends and share buybacks but for D4T4, the dividend is less than I would like.

Conclusion
The standout pick from these “six of the best” quality shares is Safecharge (SCH). The major risk with this company is that they have a dominant shareholder owning over 50% of the company but this aside, it meets all the criteria and even has a PEG ratio of only 1.02.

I draw no real conclusion from this analysis though other than if there is a market selloff, all six shares are ones I would be buying based on their quality, especially as there is an additional bias towards dollar earnings and I believe none of these companies will be significantly affected by the process of exiting the EU. Whether or not I will buy them if the market continues to defy gravity remains a decision for another day and one that I will probably make early in November.

Happy investing folks!

 

Disclosure – At the time of writing I own shares in BVXP, BJU, D4T4, SCH, VCT and ZYT

 

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